Acquisitions
Planning an acquisition: from strategy to integration
An acquisition can be decided well on the numbers and still disappoint, because of the reason for buying, the people or the integration. This guide is for founders and investors buying agencies, and it follows the decision from strategy through to the first hundred days.
In short: Start with the strategic question an acquisition answers and turn it into criteria you can screen against. Originate deliberately, because the businesses that fit best are not always for sale. Underwrite standalone earnings first and value synergies separately, counting each once and paying only for the share you are confident of. Run the process through stage gates, with people and integration settled before signing. Use structure to share risk, and keep the people who matter with incentives where you can, with earnouts as the fallback. Plan Day 1 and the first hundred days as part of the deal.
Strategy and criteria
An acquisition is a way of answering a strategic question faster or more cheaply than building. The question comes first: a capability clients are asking for, a sector or market you want to enter, a client base that would buy more of what you do, scale that changes your cost base or your attractiveness to your own buyers, or talent you cannot hire. If the question is not clear, the criteria will not be, and every target will look interesting. Buying is also not the only answer: acquire, build or partner compares the routes to a new capability before the acquisition case is made.
Turn the answer into screening criteria: size range, services, client type, geography if it matters, ownership and the founders’ likely intentions, minimum margin and the deal-breakers you will not relax. Criteria are what let you say no quickly, which is most of what disciplined buyers do.
Origination
A business sold through a run process is being shown to the buyers its advisor has selected, with competition built in; a buyer in that position competes on terms, certainty and fit. The businesses that fit best are not always for sale, and the work of origination is to find them and start a conversation before anyone else does. That means a long list built from the criteria instead of from who happens to be visible, a view on each founder’s likely position, an approach that explains why you and why now, and patience. Founders remember how they were approached. Acquisitions that work often begin with a conversation long before anyone talks about a deal.
From the seller’s side, this is the unsolicited approach described in our guide for founders. Reading it tells you what a well advised seller will ask of you.
Underwriting the target
Underwriting means deciding what the business is worth to you and why, before negotiating. Start with standalone earnings: the normalised EBITDA the target would make under your ownership with a market cost for its leadership, tested against the four questions every acquirer asks. Then consider the multiple the market would apply to that business on its own, which is a matter of comparable transactions, scarcity and the quality of what you have found.
Only then turn to synergies, and keep them in three separate categories: cost synergies you control (shared functions, premises, systems), revenue synergies that depend on clients (cross-selling, which depends on clients saying yes and tends to be the hardest to deliver) and the cost of achieving them (redundancy, systems, rebranding, lost clients). Count each once. A saving that appears in the standalone forecast cannot appear again as a synergy; a revenue synergy that needs the target’s founders to deliver it cannot be assumed if the structure gives them no reason to stay.
Decide how much of the synergy value you are prepared to pay for. Paying the seller for synergies you create transfers the value of your own work. A disciplined approach is to pay for the standalone business and, at most, a portion of the synergies you are confident of, and keep the rest as the return for taking the risk.
Execution: stage gates
Acquisitions gather momentum, and momentum is how buyers end up completing deals they should have stopped. Stage gates make the decision to continue an explicit one.
| Gate | Decision | What must be true to pass |
|---|---|---|
| Screen | Pursue or decline | Meets criteria; strategic question answered; founders’ intentions plausible |
| Indicative offer | Make a proposal | Standalone earnings underwritten on the information available; value range agreed internally; structure and role for founders sketched; funding identified |
| Heads of terms | Enter exclusivity | Price, structure, founders’ roles and key protections agreed in principle; integration owner named; diligence scope and budget approved |
| Diligence review | Proceed, revise or stop | Findings mapped to earnings, valuation, financing, structure, protection, timing or the ability to complete; no finding that breaks the strategic case; integration plan drafted |
| Signing | Commit | Documents reflect the agreed terms; Day 1 plan ready; communications agreed; funding committed |
At each gate, the question is not whether the deal can still be done but whether you would start it today knowing what you now know.
People, incentives and earnouts
In an agency you are buying people, and the structure decides whether they stay and how they behave. Earnouts share risk on the price and keep founders engaged for a period, and they are often right where the gap between your view of value and the seller’s is wide. They also create the tensions described in understanding deal structure: founders protecting a measure, buyers wanting to integrate, arguments about allocated costs.
Where you can, separate the price from the retention. Pay for the business you have underwritten, and keep the people who matter with incentives that reward what you want after completion: equity or share options in the enlarged group, retention bonuses tied to time and role, and a plan for the founders’ careers that they helped write. The second tier matters as much as the founders, and they may not be party to the deal; find out early what they expect and what they have been promised. Incentives are not a guarantee either: equity in a group motivates only if the people believe in the group’s plan and can see a route to value, and a retention bonus buys time without buying commitment.
Structure from the buyer’s side
The components are the same as for the seller: cash at completion, fixed deferred payments, contingent payments, equity, protections and the price mechanism. From the buyer’s side, the questions are what risk you need the seller to carry, how much certainty the seller needs to say yes, how the funding works and what protection the diligence findings justify. A structure that leaves the seller with too little certainty loses the deal; one that leaves the buyer carrying every risk pays twice for the same business.
Funding shapes what you can offer. Cash from the balance sheet is the simplest and the most certain to a seller. Acquisition debt adds capacity and a lender whose conditions, covenants and timetable become part of the deal. Investor funding brings approvals and a view on price. Shares in your own business as part of the consideration conserve cash and align the seller, but ask the seller to take a view on your value, which invites the same questions you are asking of them. Fixed deferred payments are a form of seller funding, and a well advised seller will ask what secures them. Settle the funding before the indicative offer, because a proposal that later proves unfunded damages your credibility with every other founder in the sector. Funding an agency acquisition sets out the complete funding requirement, with a sources and uses schedule and a downside case.
Integration, Day 1 and the first hundred days
Integration is where the value is realised or lost, and it should be planned before signing by the person who will own it afterwards.
- Before signing. Integration owner named; integration plan with the decisions already made (brand, reporting lines, systems, premises, pricing); communications for staff, clients and suppliers written; synergy plan with owners, dates and the costs to achieve.
- Day 1. Every member of staff hears the same message from the founders and from you, in person where possible. Top clients hear from the person they know, with the buyer alongside. Nothing changes for clients that they did not expect. Payroll, systems access and authorities work.
- First thirty days. Meet every client who matters. Confirm the leadership team and their roles. Agree the operating rhythm: what is reported, to whom, how often. Decide and announce the handful of changes that will happen in year one and the things that will not.
- Days thirty to one hundred. Deliver the cost synergies you control. Start the revenue synergies; they will not be finished in this period. Measure the earnout definitions in practice and fix ambiguity now. Review retention of the people you identified as critical. Report against the underwriting case as it stands.
A worked decision example
The figures below are hypothetical and simplified, chosen to show the method. They do not establish market multiples, standard payment percentages or recommended lending limits. Zero net debt and no working capital adjustment are assumed, solely so that enterprise value and consideration can be compared directly.
The standalone business. A buyer is considering an agency with normalised standalone EBITDA of £600,000, after the fully loaded cost of the leadership needed to run it. The buyer’s independently assumed standalone enterprise value is £3.0 million. That is its own assumption for this illustration and carries no information about the market.
Cost synergies. Shared finance and premises would reduce costs from year two. The buyer has modelled the savings year by year, net of one-off implementation costs, with the delay before they start and a discount for the risk that they are not fully delivered, and assesses their present value at £540,000. Treat that as an explicitly stated model input: the point is that synergy value is assessed after timing, cost and risk. Capitalising an annual saving and subtracting a one-off cost skips all three.
The fixed consideration limit. The buyer’s internal policy permits a maximum nominal fixed consideration of £3.27 million: the £3.0 million standalone value plus a £270,000 allocation from the assessed cost synergy value, offered to win the deal. The limit applies to fixed consideration, meaning cash at completion plus fixed deferred consideration. It is a nominal payment budget. It is not a present value: paying part of it later changes the funding and the timing, and it does not reduce the obligation.
| Proposed consideration | Amount |
|---|---|
| Cash at completion | £1.80m |
| Fixed deferred consideration, two equal instalments of £0.735m after 12 and 24 months | £1.47m |
| Fixed consideration (within the £3.27m limit) | £3.27m |
| Maximum additional earnout | £0.50m |
| Maximum total consideration | £3.77m |
The earnout, justified separately. The £0.50 million is not part of the fixed limit and needs its own economic case. It is based on incremental contribution that is in neither the standalone earnings nor the cost synergies: gross profit on the buyer’s services sold to the target’s clients through introductions the target’s founders make, measured over the 24 months after completion, less the direct cost of delivering that work and the cost of any additional people hired to deliver it. The earnout pays 50 per cent of that cumulative incremental contribution, capped at £0.50 million, so the cap is reached at £1.0 million of incremental contribution and the buyer keeps the other half. Attribution rules define which clients and which services count. Two cautions apply. The buyer controls pricing, the sales effort and the resourcing, so the sellers will want commitments on how the opportunity is pursued. And contribution is not cash: it is struck before overheads, tax and the working capital tied up in delivering the work, so the buyer funds the earnout from its own resources; the gross profit does not pay for it.
The decision. The seller asks for £3.5 million of fixed consideration. That exceeds the buyer’s £3.27 million fixed limit by £230,000. Lengthening the deferral does not solve it, because the limit is a nominal budget and the obligation is unchanged. The buyer has four choices: change the economics, by finding and evidencing additional value it is prepared to pay for; restructure, for example by moving the £230,000 into contingent consideration tied to incremental contribution; obtain a justified revision to its approval, with reasons that would survive scrutiny; or stop. What it should not do is approve £3.5 million because the deal has momentum.
For completeness, the present value of the fixed consideration at an illustrative 8 per cent rate is £1.80m + £0.735m ÷ 1.08 + £0.735m ÷ 1.08², or about £3.11 million. That is useful for comparing offers with different timing; it is not the figure the approval policy is written in, and confusing the two is how a nominal limit gets quietly exceeded.
Why acquisition plans underperform
Some patterns recur. Buying for a strategic reason that was never written down, so that the deal cannot be judged against it. Paying for synergies and then having to deliver them to break even. Treating integration as an afterthought and losing the founders, the second tier or the clients in the first year. Earnout definitions that set the founders against the buyer. Central charges and systems imposed on a business whose value was its independence. Momentum carrying a deal past a gate it should have failed. None of these are about the multiple, and all of them are decided before signing.
What to do next
Write the strategic question down and the criteria that follow from it. If the list of businesses that fit is short, origination is the work; if it is long, the criteria are not yet sharp enough. Our buy an agency page describes how we support buyers from strategy and origination through underwriting, negotiation and completion.
Planning an acquisition?
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Written by Rick Palmer and Rob Reid, founding partners of Motion Advisory Partners. General guidance, not advice on any specific business or transaction. Legal and tax points vary by jurisdiction and should be checked with appropriate advisors.